Playing the Expectation Game

Now I don’t wish to sound ungrateful for Thursday’s (March 25) pop in the stock, but I do have to ask: Was this trip necessary?

Thursday, Qualcomm (Nasdaq: QCOM) raised its outlook for fiscal second quarter sales and earnings. The company said it was shipping more chipsets for CDMA cell phones than it had expected.

Expected when? Why, all the way back in January, when the company, after reporting its results for the fiscal first quarter (and badly missing Wall Street estimates), told analysts to expect lower sales and earnings for the fiscal second quarter. That guidance tanked the stock.

In January, Qualcomm cut guidance for second quarter earnings to 49 cents to 53 cents a share. Sales would fall between $2.4 billion and $2.6 billion.

The March 25 guidance calls for earnings of 56 cents to 58 cents a share on revenue of $2.55 billion to $2.65 billion.

Between the January reduction of guidance and the March increase, the company announced a hike in its stock dividend and a new stock buyback program. With many companies, I’d say those actions were a sign of confidence in the future. Coming so soon after a cut to guidance had sent the stock into a spin, however, those actions strike me as attempts to support a sinking share price. (For more on that dividend increase and the buyback program, see this related post.)

The quarter closes on March 31, so you’d think this guidance, delivered just six days before the end of the quarter, is probably accurate. But based on history, I can’t be certain.

However, what worries me more is what Wall Street analysts decide to do in the month between today and the company’s projected April 27 date for officially reporting earnings. Wall Street has a history of getting overenthusiastic about Qualcomm in the run up to earnings and then feeling very disappointed afterwards. I’d worry, maybe enough to sell, if analysts’ estimates start to rise strongly as we get closer to earnings day.

As of March 25, I’m keeping my target price at $44 by May. It closed above $42 on Thursday.